BUSINESS: The AIG Bonus Scandel

Everybody from Washington to talk radio is up in arms over the AIG bonuses. How dare AIG give out bonuses when the American taxpayer is bailing them out! Congressmen are demanding names and declaring that if the money isn’t given back that they’ll pass a special tax to take the bonuses away. Americans are outraged!

Hmm.

Well, I thought I would wait a little to hear details on AIG’s bonus scandal before getting outraged myself. I’m glad I did. It turns out these were “retention” bonuses. That is, these bonuses were contracted to be given out solely for a person staying on with AIG to a given date. In other words, these were incentives designed to keep key people from bailing ship. If too many key people leave a company too quickly, the company won’t be able to function properly.

Many companies do this. The U.S. government does this. The military does this. Companies do this especially when it is likely that key employees will leave – like when the company is going into hard times.

Given that the U.S. government now owns the majority share in AIG, why would we want the company to lose key people whose loss could substantially hurt the company? Don’t we want the company to be healthy and able to pay us back?

I was especially disappointed with one conservative talk radio host who said that these people aren’t worth giving bonuses to and most anybody could have done a better job than they did. This sounded very foolish to me.

Imagine an airplane company like Boeing going through a similar crisis. Would we want Boeing to lose its key people? Could they be replaced by just anybody? I think not.

Now maybe you’re thinking Boeing couldn’t do something as stupid as AIG did.

But what if somebody came up with a new fangled material to build airlines out of? And what if the entire industry switched over to using this new material because it had a lot of wonderful properties and made everybody lots of money? Maybe a few people noticed certain problems with this new material, but when the entire industry switches over to it, those voices just aren’t heard. And so when it eventually comes out that the material has a terrible flaw, the entire industry is in deep trouble.

But does that mean we throw everybody out and start with people who know nothing about building airlines? I would hope not!

No, it is vital to retain key people. And it is quite accepted that one way you retain such people is through retention bonuses — given at the very time the company is at greatest risk of losing those people. But I guess that is just too hard to explain to the American public, so now these key people have to be publicly humiliated (and maybe even drawn and quartered).

Which in my eyes will only do long term damage to the relationship between business and government. But apparently nobody cares about that. That will simply be another unintended consequence in the hunt for scapegoats instead of soberly assessing where the real blame for this mess lies.